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InFocus

Wills for business owners

Careful will planning is essential to ensure that reliefs are maximised and inheritance tax liability is reduced while making certain that assets are inherited as the individual would wish

Practice owners are not exempt from the cycle of life, and with the complexities of owning and running a business they should most certainly have a will in place. Sadly, many do not, and their families are left to cope with grief as they sort out the deceased’s business affairs.

In fact, it is good practice to ensure that a will is in place, that it is kept up to date and that it is, if necessary, renewed every three to five years or when circumstances change.

Time to renew

As to when to renew a will, a number of specific circumstances will make the matter more urgent. These include:

  • Getting married or entering into a civil partnership as this invalidates any previous will
  • On getting divorced or separated from spouse/civil partner, for even if the divorce was amicable few would wish their previous partner to inherit their estate and unless altered a will would still stand after separation or divorce
  • When a spouse or civil partner dies
  • If children or grandchildren come along
  • If children predecease the person with the will
  • Where a business is sold and there is cash in the estate rather than a business asset

The importance to business owners

It is essential for those who are running their own business or who are a director of their own company to have a correct will in place. Without a will, their estate will follow the intestacy rules, and their business assets may be inherited by a spouse or family member who knows nothing about the business and does not have the skill, knowledge or appetite to run it.

Worse, for partnerships, on the death of a business partner if there is no will and partnership agreement in place the business could be dissolved automatically. If this were the case, regardless of how many partners remain able or willing to carry on the business, the surviving partners would have to sell the business and its assets.

Without a will, [the business owner’s] estate will follow the intestacy rules, and their business assets may be inherited by a spouse or family member who knows nothing about the business

There have been cases where surviving colleagues have gone into work and discovered that a business partner or co-director has died and that their spouse is now a new business partner or shareholder in the business. In this instance, the surviving partners would be in the unhappy position of either showing the inheriting business partner or shareholder the ropes or buying them out – potentially without the cash to do so. Neither situation is a desirable option.

A will is therefore imperative, and if correctly drafted, can be used for tax planning to ensure that the business is inherited by someone with the skill to run it while the surviving family still benefits from the value of the business as an asset.

Consider the situation of family members who have no wish to inherit the business. Here, a will can be put in place to ensure that a business partner inherits the business and the cash value of the business owned by the deceased is inherited by family members. As part of the will planning process, steps may be taken to ensure business assets qualify for business property relief (BPR), a tax relief which exempts business assets from inheritance tax (IHT).

In trust

Another option available to those planning a will would be to use a trust. If the will is drafted in a particular way, it is possible to reduce the overall IHT liability payable by the estate.

This is done by putting BPR assets into a trust so that no IHT liability would be payable precisely because of the availability of BPR. The surviving spouse or other family members would be able to benefit from the trust’s assets, but the value of the assets would be outside their estates. All other assets chargeable to IHT would be left to the spouse and family members. They could then use these chargeable assets to purchase the business assets from the trust.

Another option available to those planning a will would be to use a trust. If the will is drafted in a particular way, it is possible to reduce the overall IHT liability payable by the estate

For example, an individual owns business assets with a value of £500,000, which qualifies for BPR. These assets could be left to a trust, with all other assets inherited by family members. The family members could then purchase the BPR assets from the trust at market value and this will be settled by the transfer of the other chargeable assets worth £500,000. Once the BPR assets have been owned by the family members for two years, BPR would once more be available on the business assets, making them again exempt from IHT. An IHT saving of £200,000 (£500,000 x 40 percent) would therefore be made for the family.

But even where a business owner has a will and leaves their shares in a tax efficient manner, they should ensure that they also have a shareholder agreement or partnership agreement in place to ensure that the estate is dealt with properly. Furthermore, all business partners should be aware of what happens when one of them dies and how they need to act.

Where a will leaves shares or business/partnership interests to anyone other than business partners, a cross option agreement should be put in place to ensure that the surviving business partners have sufficient funds to purchase the shares from the deceased’s family under the terms of the shareholder or partnership agreement.

Care home fees

Many families worry about losing their inheritance to care home fees; however, careful will drafting can use trusts to remove value from the estate for care home purposes. This is usually achieved by leaving all assets to trust at first death for the surviving spouse, rather than leaving them assets outright. Alternatively, if a valuable property is at risk, just the property can be left to the trust, with the other assets passing outright to the surviving spouse or family members.

Careful will drafting can use trusts to remove value from the estate for care home purposes. This is usually achieved by leaving all assets to trust at first death for the surviving spouse

The surviving spouse can still benefit from the income from the assets and live in any property held in the trust. They can also move house but the value of the assets in the trust cannot be used for means testing for care home purposes.

This type of trust also protects assets from outside influence such as a spouse involved in a second marriage. This is a huge worry for many who want to look after their spouse but also want their own children to inherit their assets, rather than a second husband or wife. If this is a concern, leaving assets to a trust rather than directly to the surviving spouse can ensure that the capital value of the assets is inherited by the deceased’s children, not the second spouse.

Nil rate bands

Care should also be taken when planning with trusts and the family home to ensure that the correct type of trust is used so that the residence nil rate band (RNRB) remains available.

The nil rate band (NRB) is presently £325,000 per individual and is the amount of the estate which is effectively exempt from IHT. This amount is available every seven years so it is possible to make substantial gifts to the family every seven years to reduce the eventual IHT bill.

Care should also be taken when planning with trusts and the family home to ensure that the correct type of trust is used so that the residence nil rate band (RNRB) remains available.

In addition, an RNRB of currently £175,000 per person is available if an estate is “closely inherited” by children and grandchildren. This is only available if an estate is less than £2 million. If an estate is greater than this, then the RNRB is reduced by £1 for every £2 the estate is over this limit. This means that a married couple or civil partners have total exemptions of £1 million before any IHT is paid if their estate is below £2 million. This comprises the £325,000 NRB and £175,000 RNRB for each spouse.

Back to the trust, its assets remain in the estate of the surviving spouse but further will planning can be undertaken with the surviving spouse to mitigate any IHT liability. In simple terms, a will can be used to pass assets down the family line in a tax efficient manner by utilising the spousal exemption at first death so that the spouse inherits everything without an IHT deduction, either directly or via a trust. After first death, further will planning can again be undertaken to pass gifts to the family to reduce the IHT payable at second death. Of course, the rules relating to nil rate bands apply to UK domiciled individuals only. If one or both of the spouses or civil partners are non-UK domiciled there is a restriction in the number of spousal exemptions and this should be considered when drafting a will.

In summary

As has been illustrated, careful will planning can ensure that reliefs, together with BPR, are maximised and can significantly reduce IHT liability while ensuring assets are inherited exactly as an individual would wish.

For those with simple needs, it is possible to get a “free” will drawn up in exchange for a donation to a charity, Will Aid , which runs a scheme for the public every November. The slots are popular and only certain lawyers participate.

Elaine Skelton

Elaine Skelton is a director at BHP with over 35 years’ experience in tax. She specialises in inheritance tax, capital gains tax and overseas issues and is a qualified professional will writer. She is also a dementia champion, a trustee of the dementia charity Lost Chord and works voluntarily for Tax Help for Older People.


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